How inversely related are housing prices and interest rates?

In times like these, during which interest rates are the lowest we have seen in years, most will tell you that there is a never a better time to invest in a home.

I'm wondering, however if this is a fallacy. It would seem to me like the price of homes/other private real estate itself would increase as rates plunged to all-time lows, thus neutralizing the effect. Anyone have evidence either way?

re: How inversely related are housing prices and interest rates?(Posted by Gr8t8s on 1/7/13 at 6:30 pm to LSUtoOmaha)

I've seen the stats before, just can't remember them. The National Association of Realtors posted falling median and average home prices for several consecutive years. So, on AVERAGE, yes, with rates this low, it is the best time to buy a home because you are paying less for more home than 5-7 years ago.

All markets are different, though and some buck the trend. There are many cities in which home prices have continually risen during the recession. If you're in one of these cities, prices are higher, but you'll still probably never be able to get interest rates like this for the next 20+ years (barring total economic collapse and assuming some type of recovery).

The reason this is viable is because it's a buyer's market. Obtaining financing is so difficult, the pool of buyers is much smaller than it could be. Due to this, sellers have to lower prices to compete. Fewer mortgages, lower interest rates to entice investors to pick them up.

If a higher percentage of people were able to buy homes, then there would be more competition over these homes, thereby creating a seller's market. Prices would then increase and your scenario would be correct. BUT, then investors would start to flood the bond market....making rates go up.

re: How inversely related are housing prices and interest rates?(Posted by lsumatt on 1/7/13 at 6:35 pm to LSUtoOmaha)

I completely agree.

I actually think you should buy when interest rates are high (and home prices theoretically low). If and when the interest rates drop, you can re-finance so you have a low rate AND bought the house for cheap.

re: How inversely related are housing prices and interest rates?(Posted by ZereauxSum on 1/7/13 at 6:49 pm to LSUtoOmaha)

quote:I'm wondering, however if this is a fallacy. It would seem to me like the price of homes/other private real estate itself would increase as rates plunged to all-time lows, thus neutralizing the effect. Anyone have evidence either way?

This is what would happen if the market were the same as it was in 2006 but its not. Credit requirements are much tighter now. There is pretty much no such thing as a subprime mortgage anymore and you actually have to being cash to close.

So what you're seeing is a lack of demand, not because people don't find the rates to be attractive, but because so many people can't get funding.

re: How inversely related are housing prices and interest rates?(Posted by ItNeverRains on 1/8/13 at 6:42 am to lsumatt)

quote:I completely agree. I actually think you should buy when interest rates are high (and home prices theoretically low). If and when the interest rates drop, you can re-finance so you have a low rate AND bought the house for cheap.

So you would stay out the market after the biggest housing collapse in history and 3.5% 30 year money, wait until rates are at 7-8% normal historical rates, hope home prices adjust down based on rates returning there, then wait for another collapse to refi at 3.5% for 30 years?

Home prices, even in stable markets, are still depressed from 2007 levels, to think they won't return there regardless of 7-8% rates is a little naive imo

I love your BCS posts, but this seems like "trying to catch a falling knife" 101

re: How inversely related are housing prices and interest rates?(Posted by ItNeverRains on 1/8/13 at 7:06 am to LSUtoOmaha)

quote:That makes sense. So there was basically an external factor (consumer's access to entering the market) which shifted the demand curve over the past

Yes. Before crash a client I had who was a janitor making 30k got a loan approval for 300k. When my team told him we thought he could not afford 300k, he accused us of being racist, and went with another realtor who put him in a 275k house. Market crashed, house lost 30k in value, couldn't afford note to begin with, foreclosed on.

re: How inversely related are housing prices and interest rates?(Posted by LSUAfro on 1/8/13 at 7:53 am to ItNeverRains)

quote:So you would stay out the market after the biggest housing collapse in history and 3.5% 30 year money, wait until rates are at 7-8% normal historical rates, hope home prices adjust down based on rates returning there, then wait for another collapse to refi at 3.5% for 30 years?

Home prices, even in stable markets, are still depressed from 2007 levels, to think they won't return there regardless of 7-8% rates is a little naive imo

I love your BCS posts, but this seems like "trying to catch a falling knife" 101

re: How inversely related are housing prices and interest rates?(Posted by Doc Fenton on 1/9/13 at 7:10 am to LSUtoOmaha)

quote:I'm wondering, however if this is a fallacy.

I certainly wouldn't call it a fallacy. If you can lock in super low rates, then that means a lot, and you can hardly just shrug that off as something that is sure to be neutralized by other effects.

Other effects do exist, of course, but the key is how much you expect the present value of all your future payments to be, relative to how much a real estate investment might cost in other times.

All things being equal, a rise over time in interest rates would put a damper on future home price appreciation. But none of this happens in a vacuum. Interest rates are artificially manipulated based on, among other things, how high home prices are. So there's definitely some game theory type strategy that could be modeled on the periphery, but basically, the system is set up to keep things relatively stable, so as long as you don't buy when home prices are absurdly high relative to rental prices (or when you get a bad financing deal), then I think that should be the primary consideration.

By the way, aren't you the guy who always posted that Shiller chart? (The one below is from about 2.5 years ago.)

He's got all the real home pricing data you would want in his 3rd-to-last paragraph (on his Online Data webpage), and all the interest rate data (and its effect on equities) you would want in his 2nd-to-last paragraph.

re: How inversely related are housing prices and interest rates?(Posted by Doc Fenton on 1/9/13 at 7:24 am to ZereauxSum)

quote:I believe it's almost always (financially) better than renting over the long run. It's just not going to beat traditional investments.

It's something that's inherently difficult to compare to regular investments, because it's extremely difficult to separate the consumption aspect of homeownership from the investment aspect.

The historical data seems to indicate that you might be able to expect about a 1% appreciation in real value per year (compared to about 6-7% for stocks), but even so, how much of that is consumption of a depreciating house that constantly needs maintenance, and how much of that is investment in the real estate upon which the house is constructed?

When you factor in all the complications involving interest tax deductions, capital gains loopholes, insurance, landlord-tenant duties & responsibilities, etc., the big picture just gets more and more confusing.

Probably the best rule of thumb to go by is the multiple of home price to rental costs. When it gets too high, that's a red flag.